According to a report by US investment bank Lehman Brothers titled "Damocles" a fiscal crisis could engulf the US over the next 12 months leading to a significantly lower dollar. A round of applause to those massive brains at Lehmans but I'm afraid the words horse and stable door come to mind. Had they been a member of Harry Hindsight in April of last year they might have read our report titled "Sell Dollars Wear Diamonds" where we justified our short Dollar Swiss position at 1.6482. This one position ended up accounting for almost 33% of our profits for the whole of last year but what is in store for the rest? All the indicators call for a lower dollar but it will not be a straight line move as so many participants have the same position and we need to see short term players squeezed out before the trend can continue,such as we have seen this morning in the Euro/Dollar and the Dollar Swiss.
In a speech yesterday the MD of the Financial Services Authority, Carol Sergeant, said that
"Financial illiteracy remains a major challenge for some consumers" and that there was " a severe imbalance" between the low level of knowledge and the sophisticated products which many financial firms offered. Now that's a shock.
When I started in the square mile, many many years ago, for an investment bank the first lesson I was taught about banking was how to "mug the customer but leave a smile on his face." This my friends is how the majority of financial firms operate to varying degrees of success. I saw this at first hand at many major banks over the years and in fact I have to admit I was guilty of the odd bit "mugging" myself. Bankers love to make products as complicated as possible in order to hide a multitude of spreads and fees within them. At one bank on a particular trading desk if ever we had a bad position we would package it up into an "exotic option" and sell it to customers at a profit. In this context customers were smaller banks, hedge funds and large corporates. Further down the ladder a similar thing happens with consumer products. The more complex a product and the better it sounds then the more likely you are getting fleeced. In the recent past we have all seen the split capital investment trust fiasco. The head of Corporate Finance at one of the main culprits, Brewin Dolphin, defence was that he didn't realise that borrowing money against shares to buy more shares increased the risk; we accordingly gave him a book on the basics of corporate finance and the Muppet of the Year award. He declined the former but had no choice with the latter.
This product mis-selling still occurs and the FSA is right in that it is due to "financial illiteracy" but is this surprising? The whole industry, from banks to the media, are weighed against the consumer. Last week we published a report on covered warrants highlighting how they really work and showing that they are probably best left alone by the average investor. They do however make certain banks a truck load of money and they accordingly spend alot of money advertising them; yes Soc Gen we do mean you. How likely is it that financial publications are going to criticise a product of one of their major advertisers? One of the "best" current product areas is "Capital Guarantee" instruments but I think I will leave an explanation of this to another day as it will take almost as long as it does to get hold of a real life person at Barclays.
Finally, at last I hear you cry, in a strange turn of events it seems that Her Majesty's opposition is no longer the hapless Ian Duncan Doo-Dah but rather Her Majesty. The Queen has asked "He who would be King" for an explanation of how article 10 of the EU draft Constitution which states:"The constitution and law adopted by the union's institutions in exercising competences conferred on it shall have primacy over the law of member states",
effects her role as guardian of the British Constitution. The Queen obviously takes her job seriously and perhaps the conservative party might like to start doing the same.
Harry
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